Fannie Mae and Freddie Mac

Trump's Plan To Privatize Fannie Mae and Freddie Mac Leaves Taxpayers on the Hook for Future Bailouts

In his sweeping reform proposal, President Trump suggests a privatization scheme for the GSEs behind the 2008 recession, but it doesn't go nearly far enough.


JASON REED/Reuters/Newscom

Back in November of 2016, President-elect Donald Trump's nominee for Treasury Secretary, Steven Mnuchin, announced that the privatization of Fannie Mae and Freddie Mac would be a "top 10 priority" for the new administration.

Eighteen months later, the Trump administration has finally outlined a plan to reshape the two government-backed mortgage firms. But, like other aspects of the administration's recent proposal to overhaul the federal government, the suggested reshaping of Fannie and Freddie doesn't go nearly far enough.

"It's not removing government from the housing sector; it may shift government subsidies from Fannie and Freddie to other entities, but that's it," says John Berlau, senior fellow at the Competitive Enterprise Institute.

While the Trump administration's plan does advocate terminating the conservatorship of Fannie and Freddie, the proposal would also permit new firms to apply for the same type of charter, creating an environment where many more of these corporations might proliferate, bankrolled by the government. More importantly, the proposal does little to ameliorate the "affordable housing goals" that lend themselves to dangerous lending policies.

"They're saying they will make the implicit support for the GSEs explicit," says Berlau. "It's going to be something the government commits to and taxpayers are going to be on the hook for."

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs)—that is, corporations created by an act of Congress—that purchase mortgage loans on the secondary market from banks, which they generally sell to investors in the form of mortgage-backed securities. While these GSEs don't engage in the business of loaning themselves, they put money back into the hands of the bank to engage in more lending, often more than would be permitted under general market conditions.

They can do that because their securities are considered low-risk, like government bonds. They hold a multi-billion dollar line of credit with the U.S. Treasury, essentially guaranteeing taxpayer bailouts to these corporations in the event of another economic downturn.

By artificially boosting mortgage lending, Fannie and Freddie inflate home prices, and—largely thanks to the political pressures—encourage banks to lend to borrowers more likely to default. Those factors played a role in the mortgage crisis that triggered the 2008 financial collapse.

In the wake of that economic catastrophe, the federal government took Fannie and Freddie into conservatorship. It now backs even more mortgages than it did before the financial crisis. If another mortgage crisis hits, Fannie and Freddie might need $100 billion in new bailout money, according to a stress test conducted by the Federal Housing Finance Agency.

The solution to problems created by Fannie Mae and Freddie Mac isn't simply restructuring government programs, but instead completely eliminating them. In a recent piece for Forbes, Heritage Foundation Research Fellow Norbert Michel described the dangers of the GSEs: "The legacy of the GSEs, as it would be with any such private-public partnership, is crony capitalism, higher mortgage debt, higher home prices, taxpayer bailouts, and no appreciable expansion of homeownership." Trump has a historic opportunity to affect real change in a sector that's been devoid of sensible reform for a long time.

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  1. Fannie and Freddie were created for — or rationalized based on — a reason: In the post-war era of hyper-regulated banking, there was, supposedly, no way for east-coast money to get to west-coast borrowers. So the federal government had to — supposedly — create a national system of mortgage securitization to fund the build-out of California and the Southwest.

    So one could — supposedly — cut to the [C]hase and note that we have nationwide banking now and don’t need federally backstopped mortgage securitization anymore.

    But as the saying goes: Good luck with that…

    1. Fannie was founded in 1938. This was because, in the underregulated 1920’s banking industry, home loans were very risky for borrowers and lenders, and there was a market failure.
      It is similar to the FDIC — using the credit of the US government to facilitate a liquid market. The difference was that it was privatized, putting the gains in the hands of investors but the risk stayed with the government.

      It had nothing to do with geography.

      1. Markets cannot fail; we can only fail markets.

        1. “Market failure” = other people not buying the things you think they should.

          1. Have you forgotten 2008? Commodities that could not be sold at any price.
            Bank failures.

            1. All caused by terrible central bank policy.

              1. HAHAHAHAHAHA.

                Oh wait, you weren’t joking? Oh.

            2. Fraud.
              Bank failures.

              You mean the kind of fraud involving initiating high-risk loans at the instigation of the government and then selling said high-risk loans to said government whose tacit promise to buy them was a condition of “encouraging” them in the first place?

              That fraud?

              1. No, the fraud that actually happened.
                Primarily non bank lenders not subject to those regulations. Also, the packaging of derivatives in fraudulent ways. Like the abacus deals. Ever read The Big Short?

                1. You mean the fraud work that happened by central planning enablement mentioned above by S=C?

                  Without the first your piece doesn’t happen.

                  And what security does any of it really supply? Every Single Protection Failed while government regulators watched. They knew. They continued. They continued because they were told to by the government. The problem wasn’t the regulation. The problem was and is false markets created by excess dollars injected into the system to encourage the poorly positioned to take money they shouldn’t so the cronies get their money.

                  Want to encourage saving? Stop giving out credit at near zero percent to people that shouldn’t have any credit. Yeah, yeah, but people want houses. American dream. Kids do better when parents have houses. Blah, blah. What’s that about correlation and causation again? I forget how that goes.

      2. underregulated 1920’s banking industry

        You think the banking industry was under-regulated in the 1920s?

        That’s cute.

        1. Regulation was light in the 1920’s. We had a stock market crash leading to the Great Depression, the latest in a series of panics and depressions. Banking regulations were very tight. There were no panics for fifty years. Then S were deregulated, and they were bailed out by taxpayers. Then the big banks were deregulated, and they were bailed out by taxpayers.

          See a pattern?

          1. The underlying cause of the Great Depression is the exact same cause of the Hoursing Bubble: a massive runup in credit, fueled by the Federal Reserve’s artificially low interest rates.

            1. How is that supposed to have worked? How do you define artificially low interest rates?

              1. How is that supposed to have worked? How do you define artificially low interest rates?

                Interest rates offered by the government that are below what any bank would offer because the government can print money to loan you, which is essentially stealing the money from everyone holding the currency and loaning the stolen money to you at an artificially low rate.


                1. The Fed doesn’t loan money to individuals. It sets rates for bank overnight lending. You make no sense. Nobody has ever gotten a mortgage from The Fed.

          2. Regulation was light in the 1920’s. We had a stock market crash leading to the Great Depression, the latest in a series of panics and depressions.

            The previous panic had been in 1907. The one before that was 1893. Even though the 1907 stock market crash was worse than 1929, the resulting recession only lasted six months. 1893 lasted about 18 months. Neither one was even in the ballpark of being as bad as 1929-33, which happened under the guidance of the Federal Reserve System that was created to mitigate situations like the panic of 1907.

            A good analogy would be the “Opium Problem” we had prior to the Drug War, versus what we have had for the last half-century that the government has been trying to save us.

            Milton Friedman made a pretty convincing argument that if one thing of value came out of 1930s legislation it was the FDIC, which is what settled in widespread confidence in the banking system.

            Argument from correlation and coincidence is pretty weak sauce. The 2008 crash didn’t follow from relaxation of banking regulations, and I’m gonna bet that you can’t actually be specific about what regulations you think contributed.

            1. As Jordan tried to explain to you, ever since the Fed was established we depend on them to realize when they are pumping money into a bubble. Everyone knew in 2008 that they were pumping money into a bubble, but they kept doing so anyway because “home ownership is part of the American Dream.”

              Banks were told in the 90s that they needed to find a way to issue mortgages to low-income/high-risk individuals in the name of increasing the percentage of the population that owns homes. Their membership in the FDIC was leveraged to make this happen. The solution was sub-prime mortgages and secondary loans for down-payments that were then sold to Fannie Mae and Freddie Mac because they were shitty investments.

              1. Fannie and Freddie buy prime loans.
                The subprime loans were packaged by non bank lenders through non depository banks into derivatives. FDIC funds never touched them.
                The CRA was from the 70s but did not affect the non bank lenders that made these loans.

                1. Actually, the CRA effected banks and applied to their purchase of mortgage backed securities.

                  Lenders like Countrywide even had CRA programs, even though they weren’t direcllt under the CRA ( their customers were).

                  It’s funny how many people explain the CRA and don’t know that, all at the same time.

        2. Regulation was light in the 1920’s. We had a stock market crash leading to the Great Depression, the latest in a series of panics and depressions. Banking regulations were very tight. There were no panics for fifty years. Then S were deregulated, and they were bailed out by taxpayers. Then the big banks were deregulated, and they were bailed out by taxpayers.

          See a pattern?

      3. Market failure is such a bullshit term.

        1. In order to have a perfect market, you need perfect knowledge, no barrier to entry, and no externalities. In that case, markets work perfectly. They also do not exist. Every market is imperfect, and sometimes the imperfections cause it to fail. Basic economics.

          Libertarianism works with perfect markets. In other words, fantasyland.

          1. Tell them about Somalia!

          2. you need perfect knowledge, no barrier to entry, and no externalities

            Please explain what any of this has to do with government interference in the economy. Does the government have perfect knowledge? Are there barriers to entry not erected by government?

            1. Markets need to be regulated because of the imperfections. Free markets do not work without it.

              1. It’s no fun when you just come out and say “nirvana fallacy!”

          3. You don’t get that your definition of why libertarianism doesn’t work actually explains why your central planning doesn’t work. Your information gap is your problem for your top down approval, however, it is the shining glory to others.

            1. Top down approach. I hate this damn phone.

  2. Barney Frank must be proud.

    1. Your mom?

    2. Hannity and his real-estate portfolio?

    3. Jesus Christ, dude, that’s not how the Hitler game is supposed to work.

  3. “It’s not removing government from the housing sector”

    Then to hell with it.

  4. the suggested reshaping of Fannie and Freddie doesn’t go nearly far enough.

    They were bailed out when they were totally private before so unless they are dismantled completely you’re just splitting hairs that don’t exist if you think going far enough doesn’t include completely killing them.

    1. ^ This.

  5. Just for fun. Anyone looked at where these GSEs are in the fortune 500? I’m hoping I’m not the only one bothered by that.

  6. GSEs still ineffective, corrupt, & indulged …

  7. Citizen United is why we have had massive de-regulation of all banking and lending institutions. Free speech 1%style.

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